純正零件 (GPC) 2006 Q2 法說會逐字稿

Good morning. My name is Jessica and I will be your conference operator today. At this time I would like to welcome everyone to the Genuine Parts earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Ms. Carol Yancey, Senior Vice President Finance, Corporate Secretary, you may begin your conference.

Good morning and thank you for joining us today for the Genuine Parts Company's second-quarter earnings conference call. Before we begin this morning, please be advised that this call may involve forward-looking statements such as projections of revenue, earnings, capital structure and other financial items, statements on the plans and objectives of the Company or its management, statements of future economic performance and assumptions underlying the statements regarding the Company and its businesses.

The Company's actual results could differ materially from any forward-looking statements due to several important factors described in the Company's latest SEC filings. The Company assumes no obligation to update any forward-looking statements made during this call. We will begin this morning with brief remarks from Tom Gallagher, our Chairman, President and CEO. Tom?

Thank you, Carol. And I would like to add my welcome to each of you. We thank you for taking the time to be with us and we appreciate your continued interest in Genuine Parts Company. As we have done in the past, Jerry Nix, our Vice Chairman and Chief Financial Officer, and I will share the duties on the call today. We have a few prepared remarks which we'll go through first and after that we will look forward to answering any questions that you may have.

Our results for the second quarter were released earlier this morning and hopefully many of you have had an opportunity to see them. But just to recap, sales for the quarter were $2,662,000,000 which was up 8%. Net income was $120.7 million which was up 9%. And earnings per share were $0.70 this year compared to $0.63 in the second quarter last year and this is an 11% increase. These results were right in line with our previously expressed expectations of 7 to 9% revenue growth and 8 to 10% earnings growth, so we feel that we came through the quarter in good shape.

In looking at the results by segment, we had another fine quarter from the industrial operations. Their sales were up 10% following a 12% increase in the first quarter, so business continues to be good for our industrial group. And we were encouraged by the composition of the industrial sales group. We continue to see consistent increases across the spectrum of their diverse customer base as well as across their broad product categories which we think is reflective of the effectiveness of their internal growth initiatives and the overall strength in the industrial sector of the economy right now.

And as we look at over the second half we're encouraged by external factors as well. The industrial production and factory utilization figures remain at healthy levels as evidenced by the June numbers which were released on Monday, and these are positive leading indicators for our industrial operations for the months ahead. With this in mind, we're planning on 8 to 11% growth in our industrial segment over the remainder of the year and we feel good about their prospects in the second half.

Before leaving the industrial group, we are pleased to report that they completed the acquisition of Lewis Supply Company at the end of June. Lewis is a four location industrial supply operation headquartered in Memphis, Tennessee and they have annual sales volume of approximately $45 million. This is the type of acquisitions that we think makes good sense for our industrial operations and Lewis will make a nice addition to the industrial group.

Moving on to the electrical electronic group, they're having a terrific year. After being up 13% in the first quarter they topped that with a 24% increase in the second quarter. Now we should point out that these operations are getting some added boost to their sales figures as a result of the run-up in copper pricing that we've all been reading about. But even backing out the impact of this, the EIS team is still generating strong double-digit increases so their underlying business is good. And this is borne out by the most recent industry indices.

The Institute for Supply Management purchasing managers' index was 53.8% in June. This is a pretty good indicator for us and you will recall that anything above 50% indicates expansion in the industry, so business conditions remain favorable and our expectation is that this segment of our company will grow at a low double-digit rate over the remainder of the year.

The Office Products Group was up 6% in the quarter which, while down from the 13% increase in the first quarter, is more in line with our overall growth expectations for this group. In looking at the detail of their sales performance, the office products team continues to experience good balance across their four major product categories -- office products, technology products, cleaning and break room supplies and office furniture. All four of these categories experienced nice growth in the quarter and we also saw solid increases across the office products customer base, both independent office products resellers and the large national office products companies as well.

As we look at over the remainder of the year two of the indices that we monitor -- overall GDP growth and service sector job growth -- both look favorable for the second half. And with this in mind we're planning on 6 to 8% growth for the office products team for the remainder of the year.

And finally, automotive. Sales for this group were up 5% for the quarter with the core NAPA operations being up 7%. The difference is due to the downsizing of Johnson Industries from 12 locations in 2005 to four locations currently. The second-quarter automotive results were right in line with the first-quarter results, up 5% overall and up 7% without the impact of Johnson. And we feel that this indicates continued steady performance from the core NAPA operations.

As far as our major growth initiatives for the NAPA business, we made progress in the quarter in all seven key areas and we continue to feel that they are yielding good results for us. Perhaps the most visible of the initiatives is in the area of new distribution. You will recall that we did not get off to a good start to the year and we actually had a net reduction of seven stores in the first quarter which was disappointing. We were pleased to see significant improvement in the second quarter, however, adding 27 new stores. This is much more in line with our new distribution expectations and the automotive team has committed to similar results over the final two quarters of the year.

Now as far as our growth expectations for the automotive group for the remainder of the year, we feel that the NAPA business will continue to generate increases in the 6 to 8% range, but that we will still have the impact of the Johnson operations. So we're planning for the combined automotive segment to be up 5 to 7% over the second half of the year. When we put it altogether we feel that the combined 8% increase for the quarter shows continued progress and it's a good performance from the GPC team on the revenue side. And it this time we'll ask Jerry to cover the financial side.

Thank you very much, Tom. Good morning. We appreciate you joining us on the call today. We'll first review the income statement and segment information and then we'll touch on a few key balance sheet and other financial items. We'll be brief and then we'll open the call up to your questions.

A review of the income statement showed that total sales were up 8% to $2.7 billion and this was another record sales quarter for us. For the six months ended June 30th sales totaled $5.2 billion, that was up 8% compared to the same period last year. The industry remains strong and we're encouraged by the potential for more strong results over the balance of the year.

Gross profit in the quarter was 31.0% to sales and was up 25 basis points from 30.75 in the second quarter last year. The year-to-date gross profit was 31.23 and that's up 14 basis points. We feel good about our improvement in gross margin during the second quarter and we'll continue working hard to show more progress over the balance of the year. And we would add here that price increases in our business have become slightly more significant in the last few months and along with our initiative to improve product mix and customer mix -- this factored in our gross margin gain in the quarter.

For the six months ended in June our cumulative pricing is up 4/10 of a percent in automotive, 5/10 of a percent in industrial, 1.3% in office products, and 4.3% in electrical due to some of the issues that Tom previously referred to. For the quarter SG&A as a percent to sales increased slightly from 23.49 to 23.66%, and for the six month period in 2006 it was 23.94, up 16 basis points.

As we discussed in our remarks last quarter, we'll continue to be challenged by increases in items such as property and general insurance; fuel related costs such as freight and utility expenses; employee benefits such as pension, healthcare and stock option expenses. To offset these increases we're intensely managing all of the other costs in our businesses and we're making progress with the cost control measures implemented during the second quarter. We should see the benefit of these actions in our third- and fourth-quarter results. Net income for the quarter was $120.7 million, that was up 9% and earnings per share of $0.70 compared to $0.63 last year was up 11%.

Now let's discuss the results by the business segments. Automotive for the quarter had revenue of $1,363.2 million, that was up 5.2%. Operating profit $113.4 million and that's up 2.4%. So a slight margin degradation there at 8.3% operating margin. In the quarter the industrial group had revenues of $773.6 million and was up 10%; operating profit of $59.1 million was up 17%, so nice margin enhancement to 7.6 from 7.2% the prior year.

Office products, we had $427.2 million in revenue, that was up 6%; operating profit of $38.5 million up 8%. So nice operating margins up at 9.0%. Electrical had $104.0 million in revenue, up 24%; operating profit of $6.5 million, that was up 33% and that margin improved nicely from 5.6% to 6.0%. Now we look at the six months, the revenue for the automotive group was $2,590.0 million, up 5%; operating profit $209.3 million and that's up 2%; operating margins at 8.1% for the six months.

The industrial group had revenues for the six months of 1,544.8 million, up 11%; operating profit of $116.6 million and that's up 18%. So that operating margins have shown nice improvement from 7.1% to 7.5% to sales for the six months. Office products $893.2 million in revenue for the six months, that's up 10%; operating profit of 86.2 million and that's up 6% and our operating margin remained very strong at 9.7%. The electrical group had revenues of $199.5 million, that's up 19%; operating profit $11.1 million, that's up 39% so nice improvement there from 4.8% to sales to 5.6% in operating margin.

So you can say with total sales up 8% for the quarter our total operating margin improved to 8.2%; that's an increase of 10 basis points. It's nice to report some progress on this line. We're very pleased with the results in industrial, office products and electrical. Automotive continued to be challenged by higher costs such as freight and delivery expense. Now in addition, our rotating and electrical business had an impact, although we're pleased that the repositioning of this line did anniversary during the second quarter.

As we also continue to work through the situation at Johnson Industries, we're minimizing that impact on a comp basis, but we still have work to do with this business unit. As discussed in our previous calls, we continue to review all options relating to Johnson Industries. As we get these two concerns further behind us we expect to see some improvement in the automotive results in the third and fourth quarters. Had interest expense of $6.4 million for the quarter, that was down 12% from '05. For the full year we continue to expect to see our net interest expense be approximately $25 million.

The other category, which includes corporate expense, amortization of intangibles and minority interest, was $15.4 million and that's up $1 million from the second quarter last year. A primary component of other's corporate expense and due to the rising costs associated with insurance and employee benefits as discussed earlier, this category accounted for the increase. We had expected an increase in total corporate expense in 2006 and we believe this expense will be in the range of 50 to $60 million for the full year.

Now let's touch base on a few key balance sheet items. Our strong cash position of $189 million at June 30 is consistent with cash on hand at 12-31-05, but it is down from June of last year and that's due to the additional pension payments in the third and fourth quarter of '05 as well as an increase in stock repurchases and dividends. We expect our cash position to remain strong as we grow our income and continue to improve our working capital position.

Accounts Receivable increased 7% from last year on an 8% sales increase for the quarter, so our receivables continue to grow at a level slightly below our growth rate in revenue which we're glad to see. We also feel good about the quality of our receivables at the current time. Inventory was up 2% from the second quarter last year and down 2% or $54 million from year end 12-31-05. Now on an 8% sales increase for the quarter and the year, we're very pleased with our progress in this area and we'll continue to focus on our inventory management initiatives to further improve our inventory numbers over the last half of 2006.

Accounts Payable increased 5% or $44 million from last year and this represents another period of improvement for us in this area. Now our increased purchases related to stronger sales and extended terms established with the vendors driven the increase on this line and looking ahead we see even further opportunity for improvement.

Working capital was $2.6 billion at quarter end, that's up just 2% from the same period last year. Been focused on improving our working capitalization for the last few years and we're pleased that our working capital efficiency is trending favorably. Our current ratio, 3.1 to 1, and this is consistent with the second quarter last year and it just reemphasizes our balance sheet remains in strong financial condition.

We continue to generate consistent and strong cash flows and we're encouraged by the possibility this strong cash position provides the Company. For 2006 we continue to expect our cash from operations to improve to approximately $500 million and free cash flow, which deducts capital expenditures and dividends from cash from operations should be in the range of 190 to $210 million.

Our priorities for cash remain, first, the dividend which we did increase in 2006 for the 50th consecutive year. It also includes ongoing reinvestment in each of the businesses, share repurchase and, where appropriate, strategic bolt-on types of acquisitions. Capital expenditures were $31.1 million for the second quarter, that's up from $19.6 million in the second quarter last year. Year-to-date our CapEx -- $58.6 million and we would expect this to be approximately $100 million for 2006. That would compare to $86 million in CapEx for the 12 months of '05. Depreciation and amortization of $17.6 million in the quarter compared to $17.2 million last year. For the year we'd expect our D&A to be up slightly in the range of 70 to $75 million.

Another priority for us has been opportunistic share repurchases and as a part of our repurchase program we have repurchased approximately 2 million shares of our Company's stock during the first six months of the year and with nearly 1.5 million of those being in the second quarter. It should also be noted we purchased 2.8 million shares in 2005. This leaves us with an additional 1.3 million shares authorized for repurchase as of today and we don't anticipate any problem with getting additional authorization from the Board as we move forward.

We have no set pattern for repurchases, but we will remain active in the program as we continue to believe that an investment in GPC stock along with a dividend provides the best return to our shareholders. We feel good about our priorities for the cash; we continue to believe that the use of cash in these areas serves to maximize the total return to shareholders.

In concluding my remarks I would add that our total debt remains at $500 million. This represents 15.4% of total capitalization compared to 16.2% last year. As we discussed in previous calls, we expect our debt to remain at this level until our first $250 million credit facility comes due in '08. The second $250 million is due in 2011 and any prepayment of this debt is cost prohibitive due to the make whole provisions included in the debt agreements.

We're pleased with our results for the second quarter and for the six months and we're encouraged by the opportunities for more growth over the balance of the year. We're committed to show continued improvement on growing sales, controlling our cost and improving operating margins and, as usual, we'll support these initiatives with a strong and healthy balance sheet with continued strong cash flows, further maximizing our return to the shareholders. Tom, I turn it back to you.

Thank you, Jerry. So that's a recap of our second-quarter results and we feel that with sales up 8%, net income up 9%, and earnings per share up 11% we came through the quarter in good shape. And as a result we feel that we're positioned to report another solid year for Genuine Parts company in 2006.

We gave you our second half growth expectations by segment earlier, but just to recap, we're planning for growth in our industrial group of 8 to 11%, low double-digit growth in electrical electronics, office products up 6 to 8%, automotive up 5 to 7% with the core NAPA business being appointed to better. This would put us up 7 to 9% on a combined basis and revenue growth in this range should enable us to report earnings per share of $2.70 to $2.75 for the year which would be up 8 to 10%. At this point we'd like to open it up to your questions and we'll turn it back over to Jessica.

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

Good morning, guys. Just wondering if you could comment on some of the news that's been coming out from the retail auto companies and the weakness at retail. And really. I mean, you've been growing through that. I was just wondering how you expect that to develop in the coming quarters.

John, I'll take that. I can answer specifically on our company-owned store group. And for the quarter our retail sales, cash sales were up 5, our commercial sales were up 9, which is very consistent with what we saw in the first quarter. So I think we're coming through this thing reasonably well. Same-store sales compare very favorably with what we see across the industry. So I think our team is doing a pretty good job in those areas.

And do you see any risk of the consumer or the driver putting off preventative maintenance with gas prices as high as they are? It seems like a bit of a risk out there right now.

I think that that's always a factor to be considered. Fortunately for us the way our business is positioned is that more of our business is done on the commercial side and that business right now is holding up quite well. As I mentioned, we're up 9% in the quarter. So I think we're positioned as well as anybody to come through whatever happens.

Okay. And then if we could just take a step back to Johnson Industries. Are there any contracts or agreements there that are keeping you from getting out of those four remaining facilities that might lag here? And also on top of that, just if you could talk about any of your other initiatives with distributing parts to dealerships?

I think as far as Johnson specifically, we'd prefer just to say that -- I'll repeat what Jerry said, and that is we're exploring all options with respect to Johnson and we'll continue to do that and we hope to have resolution with Johnson one way or another certainly by the end of the year. In the meantime, we'll continue to do everything we can to build that business and make it the best business we can.

As far as initiatives across the dealer community, that's part of our ongoing growth strategy and that is to be a provider of product for any of the car dealerships, any of the needs that they have outside of what they need for warranty repair.

Okay. And then just one last question on the store adds. It sounds like you were on a net basis negative 7 in the first quarter, positive 27 in the second quarter. Does that mean year to date we're at positive 20 and what's really the year-end goal and what should we think about for 2007?

Yes, it is a positive 20 at midyear and we would expect a performance in line with the second quarter over the remainder of the year and we'll continue to say that 100 net new stores annually is our goal going forward.

Great, thank you very much.

Jonathan Steinmetz.

Good morning, everyone. A few questions. I just wanted to follow on to this whole topic about the do-it-yourself versus do it for me, etc. Can you talk a little bit, first of all, about maybe the pace of the quarter in the automotive business? And then secondly, maybe which product categories were stronger versus weaker to try to get some sense of what people may be differing if anything?

As far as the face of the quarter, it was fairly consistent throughout the quarter. So we didn't see any spikes one way or the other in the quarter. As far as product categories that are performing reasonably well for us, our brake category is going along nicely, filtrations going along fine, some of the collision repair products are going along fine.

I think where we might anticipate some moderation would be on some of the discretionary type items, some of the accessories for instance, and that's not a huge part of our business. So we would not be impacted as much there as maybe some others might be. But I think that's where you might anticipate some moderation in the growth.

Got it. What percentage would you quantify the discretionary accessories as, roughly?

Ours?

Yes.

It's very small, Jonathan. I don't have the number specifically, but it's not a major part of our business.

Okay, terrific. And one last question. Jerry, you mentioned the CapEx, so far we're at $58 million versus $40 million, you expect it to be up a little bit on the year up to about 100. What are you guys spending on? Where are we seeing the growth here?

Jonathan, we have some normal ongoing maintenance type CapEx vehicles and computers and things like that. We also have one or two new buildings a year. But this year the main driver of that are IT and management systems more than anything else -- and to improve productivity.

Okay. So the $[15] million or so delta is mostly IT. And would you expect -- is a lot of that related to managing inventory better or --?

Certainly that's a part of it, but I can't say it is specifically driven toward inventory. It's just to make us more efficient, more effective. Some of these projects take some time and then of course they get capitalized when they're complete and we're set and ready to go with them. So that's why sometimes that number will jump up $15 million or so in a quarter.

Okay, all right. Thank you very much, guys.

Himanshu Patel.

Good morning, guys. You talked a little bit about expecting a recovery in automotive margins in the second half, partly because of cost-cutting and I understand the rotating electrical business. Repositioning has already been anniversaried, but we're still having troubles in Q2 year-over-year on margins. Is this something that we should think about a step change increase in the third quarter or is it going to be sort of a very modest gradual improvement that maybe we see more as a sort of exit rate by the fourth quarter?

I think you can expect us to show gradual but consistent improvement over Q3 and Q4. As Jerry mentioned, we have anniversaried the rotating electrical and we are moderating some of the impact from Johnson Industries. So I think you will's need the remainder of the year show some improvement in the automotive operations.

Separate question, what is your sense -- you know, the tire industry has seen a lot of weakness recently in the replacement market as well. Is there a decent correlation there with tire sales and your aftermarket auto parts?

I would say that the tires would fit into a discretionary category like accessories and some other products, and the core of our commercial business is really on needed maintenance and repair. A certain portion can be deferred, but ultimately the repair work has to be done. And oftentimes deferred maintenance, when it finally does come into the aftermarket, is greater than what it might have been had it been done on a normal plan basis.

And then I guess on the industrial side, it looks like margins are a good 50 bps or so ahead of last year for the first half. Should we think of this sort of pace of margin improvement sort of remaining for the rest of the year, given what is happening on the revenue side?

I would say as long as we can keep the revenue in the range that we outlined, we think that we have got further opportunity for margin expansion.

Okay, great. Thanks a lot.

Keith Hughes, SunTrust Robinson Humphrey.

Two questions. First, in the electrical division, if I take the four points of price off, it is still about 20% of units and mix. And I guess was it units and mix, and was there an end-user market that you saw exceptional growth in?

No, I think the demand across their customer base was pretty strong this past quarter and has been for some time, honestly. We did mention we have had the benefit of the copper price increase, and certainly that has influenced it, but overall demand is quite good in that segment currently.

In primarily units?

Primarily units.

And we probably will see some more of this copper if, in fact, it doesn't even increase over the next couple quarters. Would that be the case?

I don't know that we could say that. At some point, there will be some moderation as well, but we don't know what is going to happen with the copper pricing going forward.

Okay. Within industrial, there has been one or two of the large industrial distributors see business weaken, although modestly, but just a little bit in the second quarter. Did you as the quarter progressed see any change in the tone of business in industrial?

No, our business continues to be fairly steady and consistent and it continues to be good and we feel good about the second half.

All right. Thank you.

(OPERATOR INSTRUCTIONS). Chip Rewey, CRM.

Just following up on the electrical, would all of the copper impact have hit the 4% price or is some of that in mix? And secondly, can you just give us a feel for the end markets there? I don't know that, maybe I should, but can you just review it?

Chip, let me answer the impact of that copper pricing on the price increasing number that I gave out of the 4.3%. That 4.3 is across all of that product category. So whatever copper pricing increase they had would have been minimized because there are a lot of product categories that have this not impacted by the copper pricing. So the 4.3 does include the increases in copper.

So the 20% unit and mix would not be inflated because of the copper run-up is really the question.

I agree with that assumption you just made.

Okay. And then the end markets, not all of them, but the top few.

The top few customer?

End markets like non-res construction, automotive -- where is this stuff going just to help me get a feel for what's really driving the units.

We well primarily to motor repair shops around the country. We sell to companies like GE, we sell to Emerson Electric, we sell to Square-D, we sell to Honeywell, we sell to Sanmina, to Celestica, to companies like that if that answers your question.

Yes, okay, thanks a lot.

Jessica, do you have any further questions?

At this time we have no questions.

Okay, thank you. We won't extend the call any further then. We do appreciate everyone joining us this morning. We appreciate your continued interest in and support of Genuine Parts Company. And if you need anything from us at any time feel free to give us a call. Have a good day.

This concludes today's Genuine Parts earnings conference call. You may now disconnect.